Open-source companies chase steady money

When entrepreneur Byron Sebastian started his company last year, he set his sights on the business software industry's ultimate cash cow: maintenance contracts.

Rather than charge large up-front fees for a product, his company, SourceLabs, will try to siphon off some of the millions of dollars corporate customers earmark for support. Like a growing number of start-ups, Sebastian's weapon of choice is open source.

The spread of open-source software, which generally is freely available, allows smaller companies to compete for maintenance money that until now has been locked up with incumbent software vendors, he said.

"Open source creates a competitive market for support and maintenance contracts," Sebastian said. "For the first time, you can build a successful business by being great at that, rather than just being mediocre."

Many industry veterans argue that open source is accelerating a shift that has been going on in the software industry for some time: Rather than hinge their business on big-ticket license contracts, software providers increasingly rely on recurring maintenance revenue.

And because most open-source tools don't have license fees attached to them, commercial open-source companies are often forced to build their businesses around services revenue, in the form of support, up-front installation or training.

With this model, purchasing software is more like committing to a yearlong cell phone contract--and less like buying a car with a large cash outlay and making regular payments later.

Although upstart open-source companies are relatively small and untested, the services-led business model reflects how more value is being attached to follow-on services than the actual the software, analysts and industry executives say. In fact, this week, industry executives at the Open Source Business Conference in San Francisco will consider the impact of open-source products on how software is acquired.